I have been checking on the changes that have taken place to the gold banking business carried out by the Bank for International Settlements since March 2009 and the bank's use of gold derivatives (essentially all are gold swaps), which have grown from zero as of March 31, 2009. All the data in the table below is sourced from BIS annual reports and from the bank's 2012 interim report published in early November. Here is a link to it:

In March 2009 the BIS held gold sight accounts -- unallocated gold -- with a number of major central banks, presumably those based in traditional gold-trading markets. Apart from the bank's own gold, the source of the gold sight accounts arose from gold that was deposited in sight accounts with the BIS with all or most of it deposited with the BIS by other central banks. Historically and especially during World War II central banks used the BIS to act as an intermediary in the gold market to protect against their gold sight accounts being confiscated or blocked by the bank holding the gold deposit. So, as an example, during World War II the German central bank held gold in a BIS sight account that was in turn deposited by the BIS in London, and consequently this gold was not confiscated or blocked by the United Kingdom government in the war.

Since March 2009 there has been a marked change in the source of the gold deposited by the BIS with central banks in gold sight accounts. It has fallen from 1,197.45 tonnes as of March 31, 2009, to 509.43 tonnes as of September 30, 2012. By March 2010 the BIS had sourced 346 tonnes of gold in the form of gold swaps -- something that had not been done for many years previously or at least not disclosed.

Yet in an article published in the Financial Times on July 29, 2010, Jaime Caruana, head of the BIS, said the swaps were "regular commercial activities" for the bank. As can be seen from the table below, gold derivatives, essentially all being gold swaps, have become a regular source of gold for the BIS to deposit in gold sight accounts since this interview was given.

The decline in the amount of gold deposited with the BIS in gold sight accounts by central banks accords with the often-claimed desire of many gold owners either to take physical possession of their gold or at least to move it into an allocated form of gold account such as a BIS gold-earmarked account, which is excluded from the BIS's own balance sheet.

Also, by their nature the gold swaps entered by the BIS provide the counterparty with a higher level of comfort. The counterparties for the BIS gold swap can presumably account for the gold as an owned asset, since the explanation of the gold swap in the BIS annual reports is very specific and says, "The Bank has an obligation to return the gold at the end of the contract." (So it would appear to meet the definition of allocated gold.)

Hence, if the BIS could not get returned to it all the gold it has deposited in sight accounts as of September 30, 2012, then it would run the risk of having to obtain up to 393 tonnes of gold on the open market to return to the gold swap counterparties. This risk is not specifically considered in the BIS's own commentary on the risks it faces.

In isolation this change in the mix of the sources of the BIS gold used in its gold banking business cannot be said to prove anything. But the reduction in the amount of gold deposited with the BIS in sight accounts is consistent with a desire by owners to exert greater control over their gold. Further, one could reasonably speculate whether gold swaps (and their increased proportion as a source of gold for the BIS gold banking business) have been used by the BIS to supply gold to avoid a default by a central bank when being asked to return the unallocated gold held in a sight account deposited with the BIS as the BIS has faced a reduction in that source of unallocated gold itself.

Whatever the truth may be, the changes in the table below are consistent with there being a tight physical market for gold where certain central banks are taking action to get a firmer grip on their metal.

* * *

Gold banking business of the Bank for International Settlements March 31, 2009, to 30th September 2012. Excludes BIS-owned gold...Totals in millions of Special Drawing Rights.

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